Charterers were holding back in the VLCC market on Thursday as a narrowing oil contango reduced financial incentives for floating storage.
Prompt oil prices rose by more than 20% amid reports Beijing is ramping up imports to fill strategic petroleum reserves and a possible supply cut agreement between Russia and Saudi Arabia.
US President Donald Trump, who is seeking to broker a deal between the two major producers, tweeted: “I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more.”
On the Intercontinental Exchange, the six-month contango for Brent futures sharply narrowed to between $6 and $7 per barrel from $11 per barrel on Tuesday. The three-month contango fell to $4.3 per barrel from $4.3 per barrel.
The dramatic development is squeezing the margins for oil firms that period chartered large tonnage last week for short-term floating storage, anticipating severe oversupply in the oil market.
Weaker margins
According to Evercore ISI’s estimates, the breakeven three-month rate for a VLCC for storage has declined to $98,000 per day from $168,000 per day.
Brokers estimated over 30 tankers were tentatively fixed on period charters at strong rates last week, removing large tonnage from spot trading and boosting vessel earnings.
But there is now speculation that some of those ships may be released back into spot markets, with the contango play becoming less favourable.
“[The oil market] is so volatile… I wouldn’t want to lift subjects unless I had an oil deal locked in,” said a London-based player.
Another said: “Any ships that haven’t been confirmed now probably won’t get confirmed at the original prices. They will be renegotiated.”
Spot trading has turned quiet with anticipation of downward correction in tanker earnings after a week-long rally.
The Baltic Exchange assessed spot VLCC earnings on the benchmark Middle East Gulf (MEG)-China route at $237,587 per day as of Thursday afternoon, down $3,511 from Wednesday’s level.
Limited downside
Data from Tanker International showed PetroChina put the 320,100-dwt Eagle Verona (built 2013) on subjects for this trade at a still strong rate of Worldscale 210, though, with a loading date between 20 and 22 April.
TradeWinds has approached PetroChina for verification.
Average suezmax earnings decreased by $2,683 to $94,814 per day, while aframax inched up by $1,881 to $50,123 per day.
Looking forward, analysts at Evercore suggested limited downside for tanker earnings regardless of any supply deal between Russia and Saudi Arabia.
“Given the expected demand destruction near term [due to the coronavirus pandemic], almost no level of…production cut is going to offset slumping demand,” they said.
“Onshore storage will continue to be filled at an accelerating pace…The floating storage decision is one of necessity as well as economics.”
“The fundamental outlook for the tanker market in the very near term remains supported by likely elevated floating storage.”
